"We overreacted to the Fed news in the last two days, though a healthy correction between 2 and 5 percent would be what investors would want to get back into the market," said Art Hogan, managing director at Lazard Capital Markets.

The Dow Jones Industrial Average slid 46.92 points, or 0.34 percent, to close at 13,880.62, after being down almost triple-digits earlier in the session. Bank of America was the biggest laggard on the blue-chip index.

Hewlett-Packard jumped more than 2 percent on heavy volume in the final hour of trading ahead of its earnings report. Traders cited short covering in the computer hardware giant amid hopes the company will surprise positively after the closing bell.

The S&P 500 slid 9.53 points, or 0.63 percent, to close at 1,502.42. The Nasdaq dropped 32.92 points, or 1.04 percent, to end at 3,131.49.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held above 15, trading at its highest level this year.

Among key S&P sectors, techs sagged, while consumer staples gained.

"I can't see the market breaking new highs with all this uncertainty," said Burt White, chief investment officer at LPL Financial. "You're seeing an awakening of both bulls and bears. Prior to yesterday, the bulls were too afraid to buy and the bears were too afraid to sell. Now the bulls are ready to take a bit of a profit, while the bears that have gotten clobbered are ready to put some shorts on. I think the Fed continues to be dovish, but the market was just looking for reason to sell."

On the economic front, the Federal Reserve Bank of Philadelphia said its index of business conditions in the Mid-Atlantic region contracted sharply for the second month in February to -12.5. A reading below zero indicates contraction in the region's manufacturing sector.

"The Philly Fed number took the market by surprise, but I think it's how much it missed by that was the actual surprise—it's a bit of a carryover from the end of last year," said White. "But it's something to watch closely—we've seen an uptick in manufacturing over the last few years. But after today's soft Philly Fed and PMI numbers, economists will scramble to revise down the upcoming ISM manufacturing number."

Adding to woes, weekly jobless claims jumped 20,000 to a seasonally adjusted 362,000, according to the Labor Department, exceeding expectations. Meanwhile, a Labor Department analyst said claims for California, Virginia, Hawaii and the District of Columbia had been estimated. The four-week moving average for new claims rose 8,000 to 360,750.

Minutes from the Fed's meeting in January released on Wednesday showed that policymakers were growing concerned about the impact of quantitative easing (QE3), suggesting the Fed may look to taper off its $85 billion per month purchases earlier than what economists and analysts had projected. Equities turned sharply lower following the minutes and finished near session lows, with the S&P 500 and Nasdaq posting their biggest one-day drop this year on heavy volume.

"Bernanke has been backstopping this market for months and if it's really going to change,that would be significant," said Uri Landesman, president of Platinum Partners."If the Fed is going to be more hawkish going forward, then look out–my year-end low target of 1,300 on the S&P will be very achievable."

Coca-Cola boosted its quarterly dividend by 10 percent to 28 cents a share from 25.5 cents a share.

Among earnings, Wal-Mart gained after the big-box retailer posted quarterly earnings that topped expectations, but guidance for the first quarter came in shy of estimates as higher gas prices and the payroll tax increase cut into consumer spending. Wal-Mart also said it would raise its fiscal year 2014 dividend by 18 percent to $1.88 share.

Late last week, Wal-Mart shares tumbled after a leaked internal company email, in which an executive said February sales were a "total disaster" so far, due to the payroll-tax increase that kicked in at the beginning of the year.

Also on the economic front, existing home sales edged up to a seasonally adjusted rate of 4.92 million, largely in line with expectations, but the supply of homes for sale contracted to the lowest level in more than 13 years, according to the National Association of Realtors. The leading economic index ticked up in January, signaling a steady growth in economic activity ahead, according to the Conference Board.